The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction or utility that they derive from the product wanes as they consume more and more of that product. For example, an individual might buy a certain type of chocolate for a while. Soon, they may buy less and choose another type of chocolate or buy cookies instead because the satisfaction they were initially getting from the chocolate is diminishing.

In economics, the law of diminishing marginal utility states that the marginal utility of a good or service declines as more of it is consumed by an individual. Economic actors receive less and less satisfaction from consuming incremental amounts of a good.

Key Takeaways

  • The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction (utility) that they derive from the product wanes as they consume more and more of that product.
  • Demand curves are downward-sloping in microeconomic models since each additional unit of a good or service is put toward a less valuable use.
  • Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell.

Law Of Diminishing Marginal Utility

Understanding the Law of Diminishing Marginal Utility

Whenever an individual interacts or consumes an economic good, that individual acts in a way that demonstrates the order in which they value the use of that good. Thus, the first unit that is consumed satisfies the consumers greatest need. The second unit satisfies results in a lesser amount of satisfaction. and so on.

As another example, consider an individual on a deserted island who finds a case of bottled water that washes ashore. That person might drink the first bottle indicating that satisfying their thirst was the most important use of the water. The individual might bathe themselves with the second bottle, or they might decide to save it for later.

If they save it for later, this indicates that the person values the future use of the water more than bathing today, but still less than the immediate quenching of their thirst. This is called ordinal time preference. This concept helps explain savings and investing versus current consumption and spending.

The example above also helps to explain why demand curves are downward-sloping in microeconomic models since each additional unit of a good or service is put toward a less valuable use.

The Law and Marketing

Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell. A product is consumed because it provides satisfaction, but too much of a product might mean that the marginal utility reaches zero because consumers have had enough of a product and are satiated. Of course, marginal utility depends on the consumer and the product being consumed.

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